SuzanneMiller

LONDON (CBS.MW) -- Although the nightmare prospect of a global meltdown has now passed, investors should by no means kick their heels up just yet.

That, anyway, is what George Soros, the notorious arbitrage guru and global philanthropist, advised in lengthy testimony before a panel of lawmakers on the U.K. Treasury Select Committee on Wednesday. The committee, made up of an all-party, nonpartisan group of government officials, were quizzing Soros on his views about the state of the world economy and the impact of the euro on sterling.

Soros is the billionaire head of hedge-fund management company Soros Fund Management LLC. He's in Britain to promote his new book, "The Crisis of Global Capitalism."

Some improvement

"Is there a danger of a global meltdown? [Things have] improved over the past few months, but there's still a lot to worry about," he warned. He said that while there have been "significant signs of recovery," there are still questions about how things will turn out -- whether an economic slowdown or a pickup will gain the upper hand.

He acknowledged that the outlook has "significantly improved" from two months ago, but he told members of the committee that the near-meltdown revealed fundamental flaws in the capital markets system. "We're liable to have a reoccurrence, which could cause more damage," he warned.

Soros said, as he has before, that it is incumbent on governments to introduce regulatory changes in order to prevent a future, potentially more lethal, financial crisis from erupting.

When pressed for his views about the impact of the euro, he said Europe would have suffered "dislocation" in its constituent economies without the single currency. But he was critical of the way the European Union, particularly the eleven eurozone countries, have handled the issue of a common fiscal policy.

"The creation of a common currency is unsound without a common fiscal policy," he said. "I am critical of the development of the EU organization as an association of states and central bureaucies responsible to 15 nations. Whatever problem a bureaucracy has is multiplied by 15."

Sterling in danger

Soros said, in particular, that Europe must embrace tax harmonization if it wants to see monetary union work. This has been a hotly debated issue in the European Union for more than a decade now. Britain is against harmonizing taxes because the United Kingdom would be a big loser, in that British taxes are lower than those elsewhere in Europe.

Britain's worry, similar to Germany's -- which is Europe's biggest economy -- is that it would bear an unfair tax burden. The U.K. economy and employment level are in many ways ahead of Britain's continental peers.

But it was Soros' comments about sterling that must have rankled most among those euro skeptics listening in on the testimony. The Hungarian-born, New York-based investor warned that unless sterling joins the European Monetary Union, which kicks off on Jan. 1, sterling could easily get squeezed between the two big currency blocs -- the dollar and the euro.

"If the value of sterling diverged with the euro, which is [tied to] the main trading partners for Britain, that would create dislocation," Soros said. "I also think sterling could become more subject to speculative attacks."

His warning will hit a raw nerve among British politicians -- especially those who are still recovering from Black Wednesday in September 1992, when arbitrageurs drove England from the exchange rate mechanism (a mandatory currency trading band for the EMU).

Consider, too, who made the arbitrage warning. Soros is, of course, the most notorious -- and wealthiest -- currency arbitrageur the markets have ever known. And like others of his infamous ilk, he won't stand idle if and when opportunity knocks.

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